Buy-to-let returns hit 14-month high

Buy-to-let landlords have enjoyed 12% total returns in the last 12 months.

Buy-to-let returns soared to a 14-month high in January, with landlords making an average of £22,000 per property during the past year.

Buy-to-let landlords in England and Wales enjoyed 12% total returns in absolute terms in the year to the end of January, according to estate agents Your Move and Reeds Rains.

Property price growth typically contributed £13,594 to the total, and a further £8,394 came from rent.

But the figure excludes any expenses landlords may face, such as their mortgage, maintenance or periods in which they did not have tenants.

Why is this happening?

The UK’s ongoing property shortage is putting upward pressure on house prices, contributing to the strong capital gains landlords tapped into during the past year.

And the fact that the country is failing to build enough homes to keep pace with demand is not only creating a shortage of homes for people who want to buy, but also for those who want to rent.

As a result, rents rose by 3.6% in the year to January to stand at an average of £790 a month.

Adrian Gill, director of estate agents Reeds Rains and Your Move, said: “Landlords’ balance sheets are looking healthier than at any point since 2014, and property investors are looking at an excellent rate of return from their portfolios.”

Who does it affect?

The robust returns are good news for buy-to-let investors, with many people using property to save for their retirement.

The fact that the sector is profitable is also good news for renters, as it should help to attract more investors, leading to greater supply and more choice for tenants.

But there are concerns that some landlords will leave the sector following a string of tax changes introduced by the Government.

Sounds interesting. What’s the background?

“Owners and renters alike will see the cost of somewhere to live continue to rise, whether expressed in rents or prices. Stamp Duty surcharges... ultimately will not change the level of demand from tenants.”

While the increase may not sound like much, it will lead to the Stamp Duty bill on a £250,000 property soaring from £2,500 to £10,000.

The Government is also changing the rules so that the tax relief landlords can claim on the mortgage interest will be gradually reduced to just 20% from 2017.

Landlords will also not be able to claim a ‘wear and tear’ allowance equivalent to 10% of their rental profits from later this year.

There are concerns that the combination of higher upfront costs and less tax relief will deter new landlords from entering the sector and stop existing ones from expanding their portfolios, intensifying the current shortage of homes to rent.

But Gill added: “Over the longer term there is a consistent and developing lack of housing for across all tenures, for a spiraling population.

“Owners and renters alike will see the cost of somewhere to live continue to rise, whether expressed in rents or prices. Stamp Duty surcharges could funnel more money from the industry to the Treasury, but ultimately will not change the level of demand from tenants.”

Top 3 takeaways

Buy-to-let returns soared to a 14-month high in January, with landlords making an average of £22,000, or a 12% total return, per property.

Property price increases contributed £13,594 of the total, with a further £8,394 coming from rent.